Principal SPIA

[celiothrkn]

The client will likely receive little to no interest on a 6 year fixed period SPIA payout in today's interest rate market. I would be shocked if he makes even $20k in interest over that period of time. The carrier, after paying commissions & issue costs & investment costs likely will be paying 1% or less on the money. If Anico is guaranteeing $443k over 6 years, that is nowhere near 5% a year, it is only 5% cumulative, so closer to about .75% annual rate

Are you 100% sure the client wouldn't also owe the 10% IRS early distribution penalty on the $23k of gains distributed? I dont recall a special exemption for an immediate annuity that is not based on IRS life expectancy tables.

Suitability wise, it may not make it through compliance review by the carrier anyway as it sure appears to be a Commission needs analysis proposal

By the time I made the second post to this thread, I had realized that ANICO's 5% was cumulative, not YoY. We'd need around a cumulative 9% or so gain on the SPIA in order to beat a 2.50% YoY CD. I had ended up telling the customer to pivot towards the CD and forget the SPIA.

Hypothetically if the annuity had been funded with non-qualified (after-tax) money to start with & we did a full surrender before 59.5, would there still be a 10% tax penalty?

The Premium Deposit Account does sound interesting, and I will look into it.

 

[Allen Trent]

Hypothetically if the annuity had been funded with non-qualified (after-tax) money to start with & we did a full surrender before 59.5, would there still be a 10% tax penalty?

The IRS 10% early distribution would definitely apply to a NQ deferred annuity surrender with gains or merely a distribution of any gain. Even a NQ deferred annuity that begins immediately monthly withdrawals and has never deferred any interest still gets a 1099 coded with the pre 59 1/2 early distribution code. At tax time, if the person doesn't have a qualifying exemption to the early distribution penalty, they would owe the penalty. While IRA & Roth IRA have several exemptions, NQ annuity don't receive many of those same exemptions from the penalty that IRA/Roth such as disability, medical or education expenses

 

[celiothrkn]

To be clear, the IRS applies the 10% penalty on the entirety of the distribution? Both the gains and the principal (aka cost basis)?

 

[DHK]

What 10% IRS penalty? This is a NQ SPIA, right?

Basis is paid out tax-free.

SPIAs are automatically exempt from IRS penalties. However, any gains would be subject to taxation.

 

[DHK]

https://insurance-forums.com/community/posts/1223280/

IRS Publication 575

Page 32. It appears the tax only applies to the portion that is considered income, it does not apply to basis. Of course, since annuities are LIFO when taking distributions, the tax will always be on the growth until withdrawn to basis.

 

[Life Hawk]

I doubt that money in a premium deposit fund would be exempt from FAFSA reporting. I'm certain that having $400k+ in a CD would impact financial aid eligibility and the efc.

Plus, with the money in the SPIA, it will be set aside for the purpose of the life policy.

However, I didn't do the fact-find, so there may be other considerations.

3 taking college classes now and that kind of movement seems to me would definitely make a blip on the FAFSA radar.

There are other ways (depending on state regs.) to treat that money so that it would be more "flexible" for educational reasons. But... get all your eggs in a row, cause you could put yourself in a real pickle if you do it the wrong way.

Rule of thumb... the tax man always gets paid... eventually.

 

[Allen Trent]

To be clear, the IRS applies the 10% penalty on the entirety of the distribution? Both the gains and the principal (aka cost basis)?

When the 10% penalties applies, it never applies to the basis. It is only applied to the amount reported as taxable. So, if a NQ Annuity has $15,000 total distribution for the year & $5000 is reported as taxable, the 10% penalty it applicable only applies to the $5000, not the entire $15,000. The entire amount would be subject to the penalty if it was a pre tax plan like a Traditional IRA, SEP, SIMPLE,etc

 

[Allen Trent]

What 10% IRS penalty? This is a NQ SPIA, right?

Basis is paid out tax-free.

SPIAs are automatically exempt from IRS penalties. However, any gains would be subject to taxation.

DHK, can you point to any source where it is stated a SPIA for a fixed period would be exempt from 10% penalty? I have only seen in the past that an exemption only occurs if the distribution is coded for SEPP/72t based on life expectancy. I have not seen in the IRS publications SPIA/immediate annuity/payout annuity listed. I ask because I have worked with young widows who have needed to turn life insurance proceeds into immediate income. we had to use SEPP rather than shorter fixed period SPIA to avoid the 10% penalties. Thanks in advance

 

[DHK]

Already did. IRS publication 575 posted above.

 

[DHK]

DHK, can you point to any source where it is stated a SPIA for a fixed period would be exempt from 10% penalty? I have only seen in the past that an exemption only occurs if the distribution is coded for SEPP/72t based on life expectancy. I have not seen in the IRS publications SPIA/immediate annuity/payout annuity listed. I ask because I have worked with young widows who have needed to turn life insurance proceeds into immediate income. we had to use SEPP rather than shorter fixed period SPIA to avoid the 10% penalties. Thanks in advance

Actually, your post makes absolutely NO sense.

1) Non-qualified annuity contracts don't use 72(t). They use 72(q). A small distinction, but it made a big difference for the other thread I mentioned above.

2) Life insurance is NOT a qualified retirement contract or even an annuity contract. Why would there be a 10% distribution penalty from the IRS??? Makes absolutely no sense. There isn't even any INCOME tax on life insurance proceeds... why would there be a 10% distribution penalty???

Now, if you put the life insurance proceeds (tax-free) into a SPDA, and then tried to take distributions from that... even then, only the INTEREST EARNED would be subject to taxation and the 10% penalty prior to age 59 1/2.